Transcript Slide 1

Retirement Income
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
LCN200803-2013997
Then and Now
Asset allocation before and after retirement
Before retirement
 Accumulation
After retirement
 Disbursement

Long-term growth

Long-term growth

Current savings

Current income

Time to recover

Downturns immediately felt

Tax-deferred growth

Minimum required distributions

Taxes
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Retirees Face Numerous Risks
Withdrawals
 What rate is sustainable?
 Sequencing by tax bucket
 Managing RMDs
Retiree spending
Replacement ratio
 Essential versus lifestyle
expenses
 Medical expenses

Longevity
Long retirement horizons—
a couple aged 65 has 25%
chance of a survivor living
to age 96
Solvency
Pension plans and retiree
benefits—a thing of the past
 Social Security and Medicare


Retirement
income
Market volatility
Uncertain returns and
income
 Impact of point in time
 Asset allocation and location
Savings
Under-funded defined
contribution accounts
 Most Americans have an
enormous savings gap


Inflation
Erodes the value of savings
and reduces returns
 Health care inflation 6%+

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Retirees Should Plan for a Long Retirement
Probability of a 65-year-old living to various ages
100%
• Male
• Female
• At least one spouse
78
75
81
86
85
88
91
50
91
93
96
25
0
65 years old
70
75
80
85
Source: Annuity 2000 Mortality Tables. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
90
95
100
105
Personal Savings Expected to Play a Larger Role in Retirement
Survey of retirement income sources
Today’s retirees
(Actual sources of income)
Today’s workers
(Expected sources of retirement income)
• Social Security
• Pension plans
• Personal savings/other
14%
37%
13%
40%
71%
21%
Source: Employee Benefit Research Institute, 2007 Retirement Confidence Survey. Data presented in 2007 Retirement Confidence Survey may not
total 100 due to rounding and/or missing categories. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Social Security is Under Strain From Fewer Workers Per Retiree
Ratio of workers to beneficiary
6.0
5.0
4.0
3.0
2.0
1.0
Historical
Estimated
0.0
1960
1970
1980
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1990
2000
2010
2020
2030
2040
2050
Inflation Significantly Erodes Purchasing Power Over Time
Effects of 3% inflation on purchasing power
$100k
$85,873
80
$73,742
$63,325
$54,379
60
$46,697
$40,101
40
20
0
0 Years
5
10
15
20
25
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar,
Inc. All rights reserved. 3/1/2008
30
Inflation and Taxes Reduce Returns
Compound annual returns 1926–2007
Stocks
Bonds
Cash
12%
10
10.4%
8
7.1%
6
5.5%
5.0%
4
3.7%
2.4%
2
0.4%
0.7%
–0.7%
0
–2
Return
After
inflation
After taxes
& inflation
Return
After
inflation
After taxes
& inflation
Return
After
inflation
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period
1926–2007 was 3.0%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
After taxes
& inflation
Sustainable Withdrawal Rates Vary Over Time
Rolling 30-year periods 1926–2007
12%
• 75% stocks/25% bonds
• 50% stocks/50% bonds
• 25% stocks/75% bonds
10
8
6
4
2
Jan 1926
Dec 1955
1931
1960
1936
1965
1941
1970
1946
1975
1951
1980
1956
1985
1961
1990
1966
1995
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot
be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1971
2000
1976
2005
Withdrawal Rate You Can Sustain May Be Lower Than You Think
Average: 1926–2007
6%
5.9%
5.1%
5
4.2%
4
3
2
1
0
75% Stocks/25% Bonds
50% Stocks/50% Bonds
25% Stocks/75% Bonds
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot
be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
The Sequence of Returns Can Significantly Affect Your Retirement
Sequence of returns matters
Actual historical return sequence
Reversed historical return sequence
$500k
$2.5 mil
400
2.0
300
1.5
200
1.0
100
0.5
0
1973
1977
1981
1985
1989
1993
Jul 1993
94
1989
1985
1981
Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of 1973 and July 1994. Assumes
inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and
not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1977
1973
Discussion of Simulation Criteria and Methodology

Many of the following images were created using parametric simulation. This model
estimates the range of possible outcomes based on a set of assumptions including
arithmetic mean (return), standard deviation (risk), and correlation for a set of asset
classes. The inputs used herein are the historical 1926–2007 figures. The risk and
return of each asset class, cross-correlation, and annual average inflation over this time
period follow. Stocks: risk 20.0%, return 12.3%; Bonds: risk 5.7%, return 5.5%;
Correlation 0.04; Inflation: return 3.1%.

Note that other investments not considered may have characteristics similar or superior
to those being analyzed. Each simulation produces 35 randomly selected return
estimates consistent with the characteristics of the portfolio to estimate the return
distribution over a 35-year period. Each simulation is run 5,000 times, to give 5,000
possible 35-year scenarios. A limitation of the simulation model is that it assumes that
the distribution of returns is normal. Should actual returns not follow this pattern, results
may vary.
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Interpreting Confidence Levels in Simulation
Confidence level
Chance of exceeding
Chance of falling short
50%
50%
50%
75%
75%
25%
90%
(More conservative)
90%
10%
This table is intended to help interpret 50%, 75%, and 90% confidence levels illustrated in the following images. © 2008 Morningstar, Inc. All rights
reserved. 3/1/2008
Simulation Can Illustrate the Probability of Achieving Outcomes
A visual interpretation of confidence levels in simulation
$10 mil
1 mil
100k
• 50% confidence level
• 75% confidence level
• 90% confidence level
10k
65 Years old
70
75
80
85
90
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for
illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. 3/1/2008
95
100
High Withdrawal Rates Will Quickly Deplete Your Assets
Simulated portfolio values (90% confidence level)
$1 mil
500k
100
50
Withdrawal rate:
8%
7%
6%
5%
4%
10
65 years old
70
75
80
85
90
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for
illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. 3/1/2008
95
100
Market Performance Affects Chance of Portfolio Shortfall
Six percent inflation-adjusted withdrawal at three confidence levels
$1 mil
500k
• 50% confidence level
• 75% confidence level
• 90% confidence level
100
50
10
65 years old
70
75
80
85
90
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for
illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. 3/1/2008
95
100
Ability to Meet Income Need Depends on How Long Portfolio Lasts
Simulation of how long a $500,000 portfolio can pay a $30,000 annual need
$35k Annual withdrawal/payment (real dollars)
30
25
20
• 50% confidence level
• 75% confidence level
• 90% confidence level
15
10
5
0
65 years old
70
75
80
85
90
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for
illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. 3/1/2008
95
100
Withdrawal Rates and Retirement Horizon Affect Ability to Meet Goals
Probability of meeting income needs throughout retirement
Withdrawal rate:
100%
Prob.
4%
80
60
5%
40
6%
20
7%
8%
0
15 years into retirement
20
25
30
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for
illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. 3/1/2008
35
Probability of Meeting Income Needs
Various withdrawal rates and portfolio allocations over a 25-year retirement
85%
97%
97%
94%
92%
4% Withdrawal rate
33%
73%
83%
83%
81%
5%
4%
30%
57%
66%
68%
6%
0%
6%
31%
47%
54%
7%
0%
0%
13%
31%
41%
8%
100%
Bonds
75% B
25% S
50% B
50% S
25% B
75% S
100%
Stocks
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do
not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for
illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. 3/1/2008
Providing for Retirement Income

Retirement risks can be managed by intelligent combination of funds,
stocks and bonds, and insurance products

How do you find the right asset mix for retirement?

age and risk tolerance

desire for consumption and bequest

expenses and fees of product choices
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008